Can I Buy a Home After Bankruptcy? Matthew C. Swanson, Esq

Many people shy away from exploring debt solutions in bankruptcy for fear that they will never qualify for a mortgage.  Credit card companies will have you believe that this is true, however, there is no merit to this assertion.  Obtaining financing for a mortgage after bankruptcy depends on which bankruptcy chapter you filed, what type of mortgage you are applying for, and whether there was a foreclosure or short sale after the bankruptcy (among other traditional requirements).

An FHA loan is a mortgage insured by the Federal Housing Administration.  The federal government insures loans for FHA-approved lenders in order to reduce the risk of loss if a borrower defaults on their mortgage payments. 

• To qualify for a FHA loan after a Chapter 7 bankruptcy – two years after discharge;
• To qualify for a FHA loan after a Chapter 13 bankruptcy – discharge is not required, but the Debtor must make twelve on-time payments to their current mortgage;
• To qualify for a FHA loan after a short sale – three years from the date of the short sale; and
• To qualify for a FHA loan after a foreclosure- three years from the date of the foreclosure.

The FHA loan requirements are much more forgiving that a conventional mortgage.  An applicant could be approved for a loan with a credit score as low as 500.  For more specific requirements, visit the FHA website and contact an FHA approved lender.

https://www.fha.com/fha_loan_requirements

Conventional Loan with Fannie Mae

The Federal National Mortgage Association, commonly known as Fannie Mae, is sponsored by the U.S. government and was established during the Great Depression to allow low-to middle-income individuals to purchase homes.

• To qualify for a Fannie Mae loan after a Chapter 7 bankruptcy – four years after discharge.  The waiting time can be reduced to two years if the applicant can show specific extenuating circumstances existed that lead to the bankruptcy filing (divorce, medical issues, job layoff, etc.).  The waiting time can be extended to five years from the date of discharge if multiple bankruptcies were filed in the last seven years;
• To qualify for a Fannie Mae loan after a Chapter 13 bankruptcy – two years from the date of discharge.  Must have no late payments during the bankruptcy plan or the two subsequent years after discharge;
• To qualify for a Fannie Mae loan after a short sale – four years from the date of the short sale.  The waiting time could be reduced to two years if the applicant is able to meet the extenuating circumstances guidelines; and
• To qualify for a Fannie Mae loan after a foreclosure- seven years from the date of the foreclosure.  The waiting time could be reduced to three years if the applicant is able to meet the extenuating circumstances guidelines.

Fannie Mae loans are not as forgiving regarding credit scores or down payment requirements as FHA loans.  For more specific requirements, please visit the Fannie Mae website and contact a Fannie Mae approved lender.  https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, is also sponsored by the U.S. government and was created to provide competition in the secondary mortgage market.

• To qualify for a Freddie Mac loan after a Chapter 7 bankruptcy – seven years after discharge.  The waiting time can be reduced to two years if the applicant can show specific extenuating circumstances existed that lead to the bankruptcy filing (divorce, medical issues, job layoff, etc.).  If the applicant is unable to prove extenuating circumstances, the waiting time could still be reduced to four years if the applicant could show perfect rental history and a minimum 680 credit score;
• To qualify for a Freddie Mac loan after a Chapter 13 bankruptcy – two years from the date of discharge.  Must have no late payments during the bankruptcy plan or the two subsequent years after discharge;
• To qualify for a Freddie Mac loan after a short sale – four years from the date of the short sale.  The waiting time could be reduced to two years if the applicant is able to meet the extenuating circumstances guidelines; and
• To qualify for a Freddie Mac loan after a foreclosure- seven years from the date of the foreclosure.  The waiting time could be reduced to two years if the applicant is able to meet the extenuating circumstances guidelines.

For more specific requirements, please visit the Freddie Mac website and contact a Freddie Mac approved lender. http://www.freddiemac.com/singlefamily/factsheets/sell/ltv_tltv.htm

VA Loan

VA loans are sponsored by the Department of Veteran Affairs and are exclusively offered to veterans who have served at least 181 days of service during peacetime, 90 days of service during war time, or 6 years of service in the National Guard.  Some surviving spouses of veterans who died while in service or from a service-connected disability may be eligible.

• To qualify for a VA loan after a Chapter 7 bankruptcy – two years after discharge.  Waiting time could be reduced to one year if the applicant has reestablished sufficient credit and the bankruptcy was caused by extenuating circumstances;
• To qualify for a VA loan after a Chapter 13 bankruptcy – applicant must only wait one year and make on-time payments during that period.  One could qualify while still in the chapter 13 with appropriate permission from the bankruptcy trustee;
• To qualify for a VA loan after a short sale – some lenders, including Veterans United, don’t have a waiting period to qualify after a shore sale.  Eligibility will vary by approved VA lender.  FHA homeowners may face a three-year waiting period; and
• To qualify for a VA loan after a foreclosure- two years from the date of the foreclosure.  FHA homeowners may face a three-year waiting period

For more specific requirements, please visit the VA website and contact an VA approved lender.  https://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp

USDA Loan

The USDA loan program (USDA Rural Development Guaranteed Housing Loan Program) is a mortgage loan offered to rural property owners by the United States Department of Agriculture. 

• To qualify for a USDA loan after a Chapter 7 bankruptcy – three years after discharge.  Waiting time could be reduced to one year if the applicant qualifies for the USDA Exception Circumstances Exception;
• To qualify for a USDA loan after a Chapter 13 bankruptcy – applicant must only wait one year and make on-time payments during that period.  One could qualify while still in the chapter 13 with appropriate permission from the bankruptcy trustee;
• To qualify for a USDA loan after a short sale – three years or with a waiver from the underwriter; and
• To qualify for a USDA loan after a foreclosure- three years or one year with reestablished credit and a waiver from the underwriter.

For more specific requirements, please visit the USDA website and contact a USDA approved lender. https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

Summary

Many are concerned that bankruptcy will prevent them from buying a home and in most cases, it is quite the opposite.  Filing a bankruptcy for those carrying significant unsecured debt could be the quickest path to home ownership, even if it requires waiting a year or two. 

Most lenders will require that all or most unsecured debt is paid off to satisfy the underwriting requirements.  Carrying large amounts of debt has a negative impact on the debt-to-income ratio and credit scores, ultimately making the applicant ineligible for a mortgage. 

Depending on the applicant, it may be quicker to wait a year or two after a bankruptcy is filed and all unsecured debt is legally eliminated than it is to pay off existing debt.  For example, if someone has $40,000 in unsecured debt (credit cards, personal loans, medical debt), would it take longer than a year or two to pay it off outside of bankruptcy?  If the answer is yes, it is time to speak to an experienced bankruptcy attorney to explore options in bankruptcy.